Sometimes, despite your best efforts, you may find yourself running into debt. If you do, it’s essential that you deal with it head-on and as soon as possible, rather than keeping your fingers crossed and hoping the problem will go away.
First, look at why you’re struggling.
If you simply don’t have enough income to cover your family’s essential expenditure, there’s every chance you’re not in receipt of all the benefits that you’re entitled to. Go back to your budget and ensure that everything you’re spending actually needs to be spent – this is money you’re spending on food, rent or mortgage, and your utility bills. If all your outgoings are essential and you still don’t have enough money to cover them, then check out what benefits you might be entitled to.
If you’re solvent on paper but regularly spend too much on non-essential items then look for ways to reduce impulse purchasing. Look again at your budget – where is the money going? What direct debits and standing orders are leaving your account? Is there a gym membership or magazine subscription that you’d forgotten about? Can you cut down on your habit of throwing in a few extra chocolate bars at the supermarket checkout? These are the kind of seemingly unimportant impulse purchases that can add up and really blow a hole in your budget.
If you’re struggling to make repayments and at the same time meet the basic, essential needs of your family then there’s a strong likelihood that you’re insolvent. Check your budget and see if there’s anywhere else you can make cuts, but if there’s not, then you need to talk to a debt charity who can talk to your creditors on your behalf.
Advice for coping with debt
If you are having problems sticking to a sensible budget, then it’s important to recognise at an early stage that you are in financial difficulty. If you are in a couple it’s essential that you talk to your partner about your finances so you can support each other and budget together. Research shows that many people don’t share a financial problem, particularly debt, with their partner and this can put an immense strain on a relationship at what may already be a stressful time.
Be honest with your bank and your credit-card company (and anyone else you owe money to). Avoiding phone calls and ignoring letters from them will not help anyone. Your bank (and your other creditors, whether you have a loan or whether you’ve fallen behind on some other repayments) will want you to stay solvent – after all, if you go bankrupt there’s no money there for them to reclaim at all. Tell them the truth and negotiate – maybe the bank can agree a temporary overdraft, or perhaps your landlord will accept your rent in two instalments for a few months rather than one big lump sum.
If you contact a UK-registered charity, they will offer you free and impartial money advice. As well as helping you to understanding your options a trained advisor will recommend which bills and debts to prioritise and if you wish they will help you communicate with your creditors or apply for one of a number of recognised debt management solutions on your behalf.
What will happen if the debts are insurmountable?
If there’s no way to pay off the debts, you will have to consider an insolvency option. Some of them are mentioned here, with a brief outline of what they entail and who they are suitable for, but this is only for guidance – seek professional help if you think you need to pursue one of these courses of action. For more information on all of these possibilities, log on to www.insolvency.gov.uk if you’re in England or Wales; to www.detini.gov.uk/deti-insolvency-index.htm if you’re in Northern Ireland; and to www.aib.gov.uk if you’re in Scotland.
DROs provide debt relief, subject to some restrictions. They are suitable for people who do not own their own home, have little surplus income and assets, and less than £15,000 of debt. These orders last for 12 months, during which time creditors named on the order cannot take any action to recover their money without permission from the court. At the end of the period, if your circumstances have not changed you will be freed from the debts that were included in your order. In England, Wales and Northern Ireland, DROs do not involve the court, but are run by The Insolvency Service in partnership with skilled debt advisers, (called approved intermediaries), who will help you with your application.
An individual voluntary arrangement starts with a formal proposal to your creditors to pay off a proportion of or all of your debts. You need to apply to the court and you must be helped by an insolvency practitioner. Any agreement reached with your creditors will be binding on them.
To get this in motion, first you find an authorised insolvency practitioner prepared to act for you; your local court can give the names of local practitioners, and a list is also available for you to look at in your local Official Receiver’s office.
Next, you need to apply to the court for an “interim order”. This stops your creditors from presenting, or proceeding with, a bankruptcy petition against you, and from taking other action against you without the permission of the court.
The insolvency practitioner will tell the court the details of your proposal and whether in his or her opinion a meeting of creditors should be called to consider it. If a meeting is to be held, the date of the meeting and details of the proposals are sent to your creditors. Only those creditors who had notice of the meeting are bound by the arrangement, so you need to have accurate records of all your creditors’ names and addresses; if the practitioner cannot contact all the creditors and bind them to the proposal, then it will fail. At the meeting, the creditors vote on whether to accept your proposals. If enough creditors (over 75% in value of the creditors present in person or by proxy, and voting on the resolution) vote in favour, the proposals are accepted. They are then binding on all creditors who had notice of, and were entitled to vote at, the meeting. The insolvency practitioner will supervise the arrangement and pays the creditors.
An IVA gives you more say in how your assets are dealt with and how payments are made to creditors, and you may be able to persuade them to allow you to retain certain assets, such as your home. You will obviously have to act responsibly and flexibly in order to reach agreement with your creditors. You also avoid the restrictions which apply to a bankrupt, and because you don’t have to pay all the fees involved in a bankruptcy, the overall costs are probably going to be less.
Bankruptcy is your last resort if interim attempts to settle your debts fail. It frees you from overwhelming debts so you can make a fresh start, subject to some restrictions, and the procedure is largely the same globally, although this concentrates on the process in the UK. It will share your assets out fairly among your creditors; you have to hand over any assets of value (including your financial stake in your home) to a trustee, who is appointed to manage your bankruptcy. The trustee will be either an Official Receiver (an officer of the bankruptcy court) or an insolvency practitioner (an authorised debt specialist).
However, appointing a trustee is a time-consuming business, so the Official Receiver will manage your bankruptcy at first, collecting information on your finances and protecting your assets for your creditors. (If you have significant assets, it is likely the Official Receiver will ask your creditors to appoint an insolvency practitioner as trustee; if you don’t, the Official Receiver will continue to act.)
When you are made bankrupt, you have to attend an interview and provide details about your debts, assets and financial situation, to help the Official Receiver protect your assets for the benefit of your creditors and decide if a trustee is needed to manage your bankruptcy. The Official Receiver investigates the cause(s) of your bankruptcy. A report will be sent to your creditors and the bankruptcy restrictions can be extended if there is evidence of criminal, dishonest or careless behaviour.
Restrictions you must agree to when you are made bankrupt include co-operating fully with your Official Receiver and trustee; handing over your bank or credit cards to the Official Receiver; and not making payments to your creditors (a non-payment rule). You do need to pay any debts that aren’t listed on your bankruptcy order – usually things like court fines and student loans.
Bankruptcy can affect your career, so think carefully before going for this option. If you run your own business, this will probably be closed and your employees will be out of a job. If you have a job, it’s possible that your contract prohibits bankruptcy: you can’t have a job as a solicitor, trustee of a charity or a role regulated by the Financial Services Authority.
Because credit reference agencies keep a record of your bankruptcy for six years, you will find it hard to get credit (for example, a mortgage), and your bank will freeze any accounts you hold and may not let you open new ones. There will also be public records of your bankruptcy, as the Official Receiver is obliged to advertise it, and this will be used by credit reference agencies to update your credit file. These public records are the London Gazette (a publication of legal notices) and the Individual Insolvency Register (an online database of insolvencies in England and Wales).
Organisations like your bank, landlord and mortgage, pension or insurance provider will be told of your bankruptcy, as are your creditors. They have to make formal claims to your trustee for the money they are owed; you can’t make payments directly to them and they are not allowed to ask you for payment. Your trustee will manage the payments to your creditors through the sale or disposal of your assets.
Bankruptcy usually lasts 12 months and after this time you are freed from your debts. It can be earlier if the Official Receiver completes their work on your bankruptcy and your creditors don’t object, and can be later if you break the bankruptcy restrictions or don’t co-operate with the Official Receiver.
Even after this, the assets taken to pay your debts will not be returned to you; and your income can be used for three years to help pay your bankruptcy debts, if you can afford it. Bankruptcy restrictions can continue for up to 15 years – for example, if your bankruptcy was the result of careless, criminal or dishonest behaviour (like fraud) – and this is known as either a Bankruptcy Restrictions Order or Bankruptcy Restrictions Undertaking.
Pippa and her husband were declared bankrupt after running up excessive credit card debts. Now, two years later, they are getting back on their feet. Pippa urges anyone with similar financial problems to deal with them as soon as possible, rather than letting them mount up – bankruptcy is a last resort and by no means an easy option. “Going bankrupt made me feel like a failure,” she says. “Going from having nice cars, nice holidays to having nothing made me feel really empty. I still get upset that we don’t own a house and have to share a car, but of course I realise we are so much better off.”
Remember – if you do find yourself with problems, you are not alone. In fact, there are an estimated 961,000 individuals in the UK struggling with debt, according to R3, the Association of Business Recovery professionals. There is help available to you, and even if you are forced into bankruptcy as a last resort, this isn’t the worst thing in the world. If you find yourself struggling emotionally while dealing with money problems, do talk to someone – if you want to chat to someone outside of your immediate family and circle of friends, consider the Samaritans, who will listen without judgement.